Q3 2019 Earnings Call
Gentlemen, thank you for standing by and welcome to the NATO Q3 2019.
Financial results conference call.
As Tom what participant lines going to listen only mode.
Go ahead Sir.
Alright, well, thanks, Justin and good morning, everyone. Thanks for tuning into pay those third quarter 2019 results conference call.
Before we get started today I'd like to remind everybody that all statements made by the company. During this call are subject to to forward looking disclaimer in advisory that was set forth in the company's news release issued yesterday.
Yeah. The room with me today, we've got virtually the entire paid a management team or Catholic Church on her Chief Financial Officer, We've got J.P., the channels or a V.P. engineering and Chief operating Officer, Dave Thomas Bee exploration is here taught verdict beep you production leaker in or a V.P., a drilling and completions and Tim Louie RVP land the only person missing.
This morning is both our newest an oldest member of the Peyto management team and that's got Robinson. So.
Scott tried out retirement a bit over the last year decided he liked working a better so we're happy to have them back on the team.
But he's out today.
[noise] anyway before I get started with my comments today about our results I Wanna again recognized the efforts of the entire peto team, including all of our fuel personnel.
Or summer this summer or fuel personnel had to deal with some much wetter conditions the normal as well as 20 prices that we're balancing all over the place and and plus wanting to react to them.
Their ability to be nimble and react to these constantly changing conditions is really what allows people to be nimble in in extracting but the maximum value at the minimum cost from our resources. So on behalf of all peto shareholders I'd, just like to throw a big showed out and thank you to the entire veto.
For that effort during the quarter.
So I just want to start off this morning, with some general comments before we open it up to questions from those listening and I'll try and keep this very brief I understand as a bunch of conference calls going on this morning, So we'll try and keep this concise.
As we mentioned in the release, we spent a the quarter continuing to execute on our reduce capital program for focused exclusively on our most liquids rich cardium play.
That play continues to achieve better well productivity use at lower and lower costs. So really we're just getting better and better at it.
Since the start 2018, we drilled around 80, some cardium walls with this new well design I think they're 44 in 2018, and and 40 plus while to your in 2019.
You know when we started wells were costing around $3.25 million for drilling and completions now we're down to around 2.25 million shall we shaved a million bucks off.
And as far as results go the the average of the first 30 days, a production or that a I.P. 30.
For the first 10 miles in 2018 was around 430 view is a day.
The average at the last 10 in 2019 that I just looked at was 825 you use a day. So we've almost double the I.P. 30 number.
Of course, a 30 day I.P. doesn't mean that much for a well that's expected to produce for 50 or 60 years, but it is a good start.
And does indicate that we're doing better we'll just have to see how.
All these numbers play out as far as increased reserve recovery goes in and more importantly, when you combine that with the reduce costs and the current commodity prices what does that mean for returns.
The last post mortem returns analysis, we did with the first half of this year suggests we're definitely getting better returns now are cardium wells than we did even in 2018.
A spot commodity prices in the quarter, we're not very good eco gas was less than a buck.
And I'm X. prices were also really soft at around 230.
Propane and butane prices were weak and after you deducted the six fractionation and transportation charges.
Actually we have much better pipe in fact fees than most in the industry. There wasn't much left for N.G. else, we got just $2.79 a barrel.
Really the only product in the quarter that made much money was gone and seen Pentanes, we average about $68 a barrel for that product, which was still a discount from the light oil prices 75 Bucks a barrel.
Thankfully, we were very well hedged on our gas sales, we did a good job of keeping cash costs down too so that allowed us to.
Still deliver a cash netbackup around 10 Bucks if you eat.
And obviously that allowed us to continue with our streak of quarterly earnings which is up to.
59 consecutive quarters now.
I haven't seen too many gas producers this quarter, who have been able to post, earning so that's a testament to or low cost and high margin business.
Perhaps one of the most material things that happened in the quarter was the achieved negotiation with T.C. energy Transcanada, the Alberta government and the industry altogether got together on a new supply management system for next summer.
PETA was very involved in that effort to get this new temporary service protocol as they call it in place.
Now we've started to see the effect of it it's been in place for the last 25 days of October .
And during that period, aiko traded much better than dawn or Nymex for that matter. So the net of transportation. So so the net effect is is a very well connected to Alberta gas market. That's what we were driving for with this protocol and so to have it in place ready to go for next summer.
To help keep the market connected is really important.
It significantly improve the foreign curve for Aiko, particularly in light of this winter.
Of course, very low storage levels. We're also at play and those are going to ensure that some very strong eco prices for this winter and then the temporary service protocol for next summer will ensure we have access to storage over the summer and should drive song stronger summer prices.
We think next summer's Aiko actually still has some room to move up.
As this starts to get absorbed by the market yesterday, Transcanada announced a preliminary.
Maintenance periods for the summer when obviously this T.S.P. would kick in so that's that's important news for the market, we'll see how he response to that.
More broadly, we even see the storage situation in Alberta, having a positive effect on Nymex.
Really you know if eco storage was that normal levels and instead the U.S. storage was 200 VCF last today, we think Nymex would be much higher than it is today. So you know it's gonna be interesting to see how this winter plays out with less scouts available to be exported from western Canada into the U.S. market.
Because of the storage deficit.
So it'll be interesting to see how nymex responds to the shortage of gas supply in Alberta.
All of these things translate into much better forward looking prices for natural gas, which again means that are economics or looking much better for a all of our sweet of gas locations and it's time to put a more capital to work.
So we sparked up to more drilling rigs to get after it I think we've even got a fifth rig or in the wings.
If we need it. These two rigs are likely going to drill mostly spirit river locations give us a little more exposure to this unhedged aiko spot prices through the winter.
And then we'll see how things are shaping up for next summer.
We we haven't quite finalized are 2020 capital budget.
Obviously reacting.
Most recently to the commodity prices here and we're going to be doing that over the next few weeks, we'll release that after we've got board approval and then share those details of our plan for 2020 going forward.
As far as the balance she goes you know really by growing production and getting a better price for it we should see significant improvement in our funds from operations from what we're looking at before and since we're doing all this with cash flow and we're not adding any debt, we'll see a better ratio of death cash flow going forward. So you know that's a stronger balance sheet.
Generally speaking and looks positive into the future.
So you know all at all I think Q3 was a a tough quarter, but we're through it and are already looking forward to much better days ahead, as we head into the winter.
So we're pretty positive about the outlook here going forward, particularly for Pado and and of course for the natural gas industry in Western Canada.
So maybe that's enough about the court adjusting maybe we could throw it open to a questions from our listeners yes Sir.
As a reminder to ask the question.
<unk> on your telephone Java class press the pound key.
Mildly compiled a CUNY roster and again, ladies and gentlemen that is star one ask the question.
And I first question is going to come from Adam Gil from eight capital.
Oh, good morning, guys. A two part question here with the second with the two additional rigs added <unk>, how many well do you expect to bring on streaming queue for in both the cardio transparent River plays where do you expect a cue for Catholics to shake out and the second part of the question is based on the contemplate.
$250 million to $300 million and spending next year, how many cardium and spare a river wells are envisioned in that plan.
Okay, Adam Thanks to those questions. So maybe we'll start with the first one and just look at Q4 here with these extra <unk>, what was that well count we anticipated their J.P.
So our total well count for the year, we expect was about 53 wells, we still have another.
If you count this last quarter about.
Well since drill.
Looking right now accelerating some of that.
Into from even 2020 into 2019, so depending if we do that drove through Christmas that might change a little bit, but we'll capital spend for the corridors expect to be lots around us up closer to the 200 million Mark we have in our guys.
Perfect and then.
The 250 to 300 next year I mean, we haven't got an official approved budget by the board, yet, but <unk>, what's the sort of break down there. So the break down there you know we you know we've with that strip price coming up it's a good question not leaner and meaner gas you know their spirit River opportunity start to hunt as we and that's what we're going to target.
A lot more with these two makes a lot more to spare ever program. So perhaps as much as 30, 30% to 40% of our our plan walk out you know assuming we tend to get the price you know prices, we expect and the results. So you know 30% to 40% of our program next year will be geared towards that you know.
Plan for next year for total walls with the.
Somewhere in the range of about 80 gross well so I don't know working interests and whatnot, so 30% to 40% of that would be in the spirit River I'd expect than the rest in the cardio and the rest in the car.
<unk>.
Critics thinking about ask a question that.
Yep. Thank you.
Right.
Thank you and again, ladies and gentlemen, if you have a question <unk> Star one again that is star one.
My mom if a question.
I'm showing no further questions I would now like to turn the call back over to Deringer, President and CEO .
Good Thanks, Justin we had a bunch of questions come in over the overnight or email questions from shareholders. So I just want to run through and maybe address some of them here. This morning.
One of them for was from a Jordan here, he's asking again about capital allocation between Cardium, a spirit River GPU address that already.
He was wondering though what the relative economics look like between Mills plays can you give us a sense of.
Maybe how the IR ours are stacking up with the with the better.
Many prices sure so when we look at.
The Cardium program for example, when we look at this first half program when we look back to what we've achieved.
So those economics, especially with this higher NGL yields than we expected and a cheaper drilling costs drilling and completion costs, but look backs that we've done on our first half program show the vast majority of those those wells give us returns over 40% you know and that's on a $2 gas price.
And a 55 to $55 got BTI. So now the spirit River would stack up against that.
We are certainly targeting wells that are going to have a little bit more liquids and.
Higher gas rates, so those those wells would be comparable and thats why there are going to be competing for that capital allocation for next year.
Perfect.
Justin was also asking.
There is a little bit information leaking out through the public domain butter, montney, well, but Todd maybe no can you give us little more update on the money I don't know how much when talking about it gets here I can talk a bit about it so.
We were able to test the well intermittently through the summer and fall.
We of course, it over a shorter test period, but we had to deal with wet weather in that hampered some water hauling efforts and we had few operational issues that came about due to limitations of our temporary surface facilities as well line pressure impact due to our Cardium program effective.
The ability for the well the flow.
Little bit.
With the intended attachments to flow back as much will.
Flow back much frac water possible get the well cleaned up.
Confirmed needs to have concentration.
During the flare period and understand the flow characteristics of the well.
So through that process, we determined that the age to asses low enough that we can Sweden and onsite.
Which is great, which would allow them to produce to our while the gas plant.
In fact through the majority of the test period, we were able to sell gas rather than flaring.
We're also able to determine that in order to sufficiently clean up the well we need to employ affordable gas lift. So we took all that information.
We were confident that we had a somewhat steady state condition. So that we could start engineering work on permanent facilities. So that process is finished and we're currently waiting on delivery on some of the equipment.
We should have the well flowing intermittently again in a few weeks and then have that fit for purpose compressor installed and running later December .
And this is all this to clean up the Frac water, what what was the volume that we ended up.
25 wells.
Yes. So those are in cubic meter, yes were about 31% recover 30% recovery today, 39%. So we've got a lot more to the I'm still making a lot of water makes it difficult.
Okay perfect. Thank you for that we had a question overnight.
From an investor airing was asking and maybe I'll direct you to you copy about debt covenants.
Cash flows were obviously following as our production was dropping off and as we were going through these low price.
Environments over the last couple of years now we've got weakness in the U.S. gas price and that looks like it could persist for a bit.
Can we comment on the impact that this might have on our debt covenants and satisfying those debt covenants.
Maybe further comment on.
Generally Canadian gas producers, who are do dealing with this difficulty.
Sure Dan.
Obviously lower commodity prices Scott.
Cash flows need the gas which hasn't.
Impact on our debt covenants.
However, with the recent strengthening of the commodity prices and higher production going forward. We expect that cash flows will be bolstered and we'll have a positive impact on the debt covenants, we do regularly.
Financial model to forecast.
And we model many scenarios, we stress test these models for a variety of factors, including lower commodity prices and then we.
Allow that allows us to put plans in place to address some of those factors averaged about mitigation strategies whether that.
Management contract financial derivative hedging.
Contracts et cetera, and we also.
When you adjust our plans.
On to address any issues and opportunities as they occur we've always been able to you that appeal and we continue to do that going forward.
Another.
Big factor I think is that we have extremely good relationships with our lenders and we have a while communication with them fully understood our business model and been extremely supportive.
About model.
Going forward, we still continue to rely on them that were low cost.
Sir and.
And that we've always been strong.
Great.
Actually Nexus asks the second question there.
Regarding some of that risk management in the marketing strategy.
You know theres been a departure from the past practice of putting hedges on regularly and mechanically.
Without trying to time to market, but.
Has that changed and also with respect to or the U.S. gas prices in the weakness down there. We've got some aiko Henry hub basis deals that are looking nearly as attractive as they were so if this situation between eco getting stronger and Henry hub getting weaker persists can we reverse out of some of.
Those deals.
You know the first observation is correct.
When gas prices started to fall year, or so ago, and they really got particularly weak we did stop our mechanical hedging practice.
We have sort of two gas marketing strategies, one is to diversify our markets have some exposure to echo some exposure to us markets trying even get some direct connection.
We don't lined out a couple of years ago as a strategy that we were going to pursue but then we would expect to be fixing prices at those various markets in order to get security of price going forward to be able to plan or capital programs peer dividends and whatnot.
And we had to depart from that because the pricing we saw at some of those markets, particularly eco market. So we.
We would be locking in prices that we didnt really work with our business. So.
We actually stopped hedging.
Become more exposed going forward to the spot prices.
And the fact that the seasonal.
Pricing has become so volatile.
Meant that.
We had to have protections going forward, we really need to have protections in place more in the summer than we do in the winter. So we've taken on a bit of a modified strategy, we're going to be hedging more of our future Jasim summer and less in the winter to be able to take advantage of some of the volatility on the winter price on the high side and protect.
Again, some of the volatility on the gas prices on the low side during the summer.
So it is a bit of an evolving marketing strategy for sure, especially as we diversify to different markets.
As pointed out we do have a bunch of eco Henry hub basis in place, which is like a synthetic transportation to the Henry hub. It allows us to fix Henry hub prices, which we did throughout this past summer.
Successfully but they are relatively expensive and as Henry hub drops in as eco strengthens.
That.
It doesn't look like its.
Good opportunity be heading heading south with the gas now that being said you know markets are always changing and we're trying to forecast and predict which markets are going to be the best thats kind of hard to do it in the short term.
Basis deals actually allow us to be very flexible that way the only physical commitment with the basis is to get our gas it at onto the Nova pipe and delivered admit so beyond that it's really more of a financial effect, we could in fact.
Forgo the Henry hub sales and sell the gas.
And just eat the cost of the basis, if we wanted to so thats kind of like unwinding. It we don't feel good that strong we'd rather just sell it there we don't have to actually sell it at the Henry hub.
Alternatively, if Henry hub strengthened so we can start to fix the price at Henry hub, along with that basis discount that gives us a fixed price sort of an equal equivalent price, but gets us a diversified market. So we get to choose which market really to sell it into with those basis deals. So I think.
There are flexible thing, obviously, we put them in place when the cost to get to the Henry hub was a lot higher but the price of Henry hub has a lot higher so those bases look expensive today relative to the current basis, but so with a for everybody else that had the same strategy.
So that's a good question regarding our marketing strategy and that has definitely changed overtime.
There was another question that came in.
Overnight from Dan He's asking about.
What this fourth quarter looks like with the meaningful increase in capital.
How is production going to ramp up.
We are obviously.
Drilling more today and we started up these these two extra rigs here in the fourth quarter.
Of course, we want to take advantage of pad drilling and so we've got.
Basically all our rigs working off of multi well pad sites. So that takes a little longer than to get wells drilled and completed but you get the out and savings obviously of pad drilling.
A lot of the production addition from this fourth quarter activity shows up in December two we've gotten all the fracs on I think GPU counted up how many wells, who we bring us here by the ended the year approximately 14 net fortinet wells. So lot of this production hits us in December which is great because that's the winter season when we.
One it.
And like you mentioned there it looks like it probably pushes up to the high end of our capital guidance for 2019.
And perhaps even if we drill rate through the Christmas break we might we might pop through the upper end of the guidance a little bit but.
There's nothing magical about December 30 Onest.
When its winter is winter and so we're going to get after drilling right through and bringing on new production into that stronger winter price.
So hopefully that answers Dan's question.
There was a couple of questions. It came in overnight from two different guys Michael had won.
And other one here from Mickey and both related to this end GTL.
Temporary service protocol.
Thats in place and how does that affect things and could we explain that a little more.
Why did it have such an immediate impact on prices and from a big picture perspective, what do we expect to be some differentials to do going forward.
And why did the regulatory change lead to such.
A big reversal.
No the problem with.
The old.
Sort of priorities that Transcanada had was that they were putting priority on from receipt and from delivery service on their novus system instead of trying to maximize the market that we had available to us and storage is really a market and so when they were denying access to storage by not offering any year interruptible delivery service.
That's what storage relies on.
We really took storage out to the game and storage is a market for western Canadian gas, particularly in the summer.
And we need that market to balance off the seasonal.
Demand variability.
So by changing this protocol, we immediately had access to storage again, the interruptible delivery service in the East Gate area, where the storage reservoirs exist went from zero to 100% and so storage reservoirs, we're able to nominate for for volume off the system.
This was even during October and so they were buying gas at higher price, even expecting of course that this winter they were going to be able to pull it out and sell it at even higher prices.
And with that storage mechanism functioning properly, obviously tightened up the differential between the eco market and the other North American markets. In fact, there was such a huge demand for gas because our storage is so empty that it was trading at a premium as I mentioned.
So thats why the impact is sold mean immaterial an immediate is because it immediately brings more market more demand back to the Alberta market in a large.
Amount of demand in fact.
Storage can accept up to a Bcf a day.
Gas or maybe even more into their reservoirs when there is demand and they can deliver onto the system. The reverse that can deliver about a year or be in a half a day so relative to the 12 Bcf a day.
No the system, that's very material to the market, it's a significant amount.
No different than saying, we take a 1000 megawatts power and added to the Alberta power market, what would it due to prices or take it away from the Alberta power market what would it due to prices.
Similar similar type thing so definitely this is a very important function.
It proved to US you know really that storage is a very important part of the Alberta market that we needed we need to have storage with the seasonality and the weather and with the demand.
And so we want to make sure that we retain that.
The particular part of the market going forward.
Got it with this temporary service protocol does particularly for 2020.
20 summer and then beyond that I mean, Transcanada is expected to have added significantly to the capacity there are no the system such that.
Storage will still be allowed to function, but will also be able to move all the volume we want to the borders and to the markets within Alberta, and there isn't going to be nearly the same kind of restriction.
Industry quite frankly is going to have to start growing its supply because transcanada's, adding close to three bcf of additional access to market through their Nova system expansion to the end of 20 121.
And where we're not really planning as an industry to grow by three Bcf a day.
Yes, that's with the pipe capacity is going to be so there's going to be an interesting dynamic here coming up I think pricing is going to have to be the.
The mechanism to drive additional production growth to fill that pipe.
So as we see the eco price continue to climb.
That's going to be the thing that starts to stimulate producers to go to drill.
I guess paid it was a bit on the front end of that.
Behavior in that activity, but.
Transcanada is kind of banking with $9 billion of capital investment on the fact that industry is going to grow their supply and be able to access.
These new markets with this additional pipe so.
We've got to big job in front of us as an industry, we've got to get after it and we're looking forward to that this winter.
We've been sort of.
Conservatively spending over the last couple of years really.
Paying down debt and waiting for this segrest com waiting for this market connectivity to come now we're seeing it and so as a gas producer in Western Canada, We're pretty excited about getting back to work in a more fulsome way the way we have in the past in delivering a lot more return.
On a larger capital program to our shareholders going forward. So.
You know for as much as it's been a very big struggle over the last couple of years to be a Canadian gas producer.
We're seeing a lot of brighter days ahead of us and it looks very exciting to move forward into this new connected market.
We're excited at Peasquito, and we're Reengaged and it's nice to be playing some offense again as opposed to just playing defense.
Arguably since we have the goalie back in there in the net.
Now Scott Robinson was Oh has been.
Goliad These hockey days so.
Nice to have him back in the net we can go go ahead and be a little more aggressive on the offensive side.
So.
Thats, a pretty good wrap up for the quarter I think that answers everybody's questions. Thanks to those for listening and participating in the conference call today.
We're excited to get going here in this fourth quarter and we'll be back to you with results.
In the early part of the year and.
Through the winter and the should be some exciting times coming up.
So just too I think thats the end of it will turn it back to you. Thank you Sir.
Ladies and gentlemen. This concludes today's conference. Thank you participating you may now disconnect.